The House of Representatives on Tuesday voted to extend a moratorium on internet-only taxes by two years until November 1, 2003, providing more time to tackle the thorny issue of how state sales levies apply online.

Originally passed in 1998, the Internet Tax Freedom Act bans taxes on access fees and other multiple and discriminatory taxes on e-commerce. The original moratorium is due to expire on Sunday.

Some forty-five states operate sales levies, but under a Supreme Court ruling, cannot force a business to collect sales tax unless the company has a physical base, or ‘nexus’, in that state. The extended moratorium is intended to provide time for a simplified system for the collection of taxes on distance sales, such as the internet, to be hammered out.

The ban does not apply directly to the collection and remittance of sales taxes by e-tailers. Instead, it prevents online shoppers being subject to predatory state and local taxes levied specifically on web access and sales. Christopher Cox, the representative who introduced the motion to extend the ban, warned “all hell may break loose” if the moratorium lapsed.

The Bush administration supports the extension, but would have preferred longer than two years. “We won’t be able to address all of the sales tax and nexus issues,” commented Mark Weinberger, assistant Treasury secretary for tax policy. "We definitely need to extend the moratorium. We are supportive of a short-term extension.”

The continued growth of e-commerce may cause diminishing tax returns unless a new system can be fashioned. A study recently published by the University of Tennessee estimated that some $440 billion of taxes could be lost over the next decade if nothing is done.

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